9. Stocks that don't pay dividends yet
Goodwin Technologies, a relatively young company, has beenwildly successful but has yet to pay a dividend. An analystforecasts that Goodwin is likely to pay its first dividend threeyears from now. She expects Goodwin to pay a $4.25000 dividend atthat time (D? = $4.25000) and believes that the dividend will growby 22.10000% for the following two years (D? and D?). However,after the fifth year, she expects Goodwin’s dividend to grow at aconstant rate of 4.08000% per year.
Goodwin’s required return is 13.60000%. Fill in the followingchart to determine Goodwin’s horizon value at the horizon date(when constant growth begins) and the current intrinsic value. Toincrease the accuracy of your calculations, do not round yourintermediate calculations, but round all final answers to twodecimal places.
Term | Value |
|---|
| Horizon value | ________ |
| Current intrinsic value | ________ |
If investors expect a total return of 14.60%, what will beGoodwin’s expected dividend and capital gains yield in twoyears—that is, the year before the firm begins paying dividends?Again, remember to carry out the dividend values to four decimalplaces. (Hint: You are at year 2, and the first dividend isexpected to be paid at the end of the year. Find DY? and CGY?.)
| Expected dividend yield (DY?) | _______ |
| Expected capital gains yield (CGY?) | ________ |
Goodwin has been very successful, but it hasn’t paid a dividendyet. It circulates a report to its key investors containing thefollowing statement:
Goodwin has yet to record a profit (positive net income).
Is this statement a possible explanation for why the firm hasn’tpaid a dividend yet?
a.Yes
b.No
